The leader of Britain's largest trade union has urged the Labour party to adopt a "radical alternative" to the coalition and warned that the government is "forfeiting the right to rule".

Len McCluskey, the general secretary of Unite, warned that the establishment was attempting to push unions outside the law, citing a high court injunction last week that disrupted a bus strike in London. He said: "As Bob Dylan once sang: 'To live outside the law you must be honest.' So, I will be honest and tell anyone in government thinking of putting unions effectively outside the law – beware what you wish for. For you will rue the day."

Speaking at Unite's policy conference in Brighton on Monday, he said that Unite would support its 1.5 million members "come what may" and would "no longer lie down before injustice".

Pointing to the furore over the treatment of unpaid stewards during the Jubilee celebrations and a series of U-turns on George Osborne's recent budget, he said: "If you wanted to make the case for the importance of trade unionism today, I would point to just one image. It's the image of unemployed young people being forced to sleep under London Bridge before getting up to work for nothing on the day of the Jubilee celebrations … Even when Thatcher was at her worst, I do not recall such naked slave labour being used." He added: "This is a government forfeiting the right to rule."

McCluskey's speech also delivered a critique of the Labour party. Unite is the party's biggest donor, giving around £3m a year. The Unite leader said the Conservatives and Labour were guilty of committing errors over the past decade. "Everything from the criminal error of the Iraq war to the disaster of neoliberal economics, recent times have seen both frontbenches united in one blunder after another, for which the people pay the price."

However, McCluskey said Unite would not "shrug and walk away" from politics, and urged members to vote to retain the union's political fund, which donates to Labour.

Picking up recent warnings from the GMB and Unison unions that Labour must be reshaped, McCluskey said he was "frustrated" by the union movement's failure to make headway with the previous Labour government.

"I share the frustration over the fact that the last labour government took trade unionists' money – our members' money – while treating us with disdain."

Sounding a more conciliatory tone than earlier this year, when he warned Ed Miliband that backing public sector pay restraint could destroy the party, McCluskey urged the party to adopt a "radical alternative". He said: "I believe Labour has started to change. We have in Ed Miliband a decent man and an increasingly powerful leader (we have our difficulties of course), but I believe he is leaving much of what millions of people liked least about New Labour behind."

In a nod to renewed union pressure against New Labour thinktank Progress, he said: "There are still the New Labour diehards looking to the past before 2008 and the crash." Indicating that he would not back calls to exile Progress from the party he said the "diehard … Have a right to their views of course." Hailing the launch of a union-backed thinktank, Class – the Centre for Labour and Social Studies – McCluskey called for the kind of policies that delivered a Socialist victory in the French presidential election, including: publicly owned banks, higher taxes on millionaires, and constructing 500,000 new homes a year.

McCluskey also warned that more strikes were "inevitable" if a deal was not reached in the London bus dispute, which involved thousands of drivers striking last Friday in a row over Olympic bonus payments.

More than 20,000 bus workers affiliated to Unite are seeking a payment of £500 to work during the games, which they say is in line with rewards for staff on London Underground and Docklands Light Railway.

He said: "This is a straightforward dispute about fairness – giving hardworking bus workers the same bonus for facing challenges that have already been awarded to other transport workers – and a fraction of the bonuses being paid to TfL bosses. I say to Boris Johnson and the rest of the bus companies, sort it out or more strikes are inevitable."